LandLandTheThe EconomistEconomist Win t e r 2002-03, Vol. 33, No.1 A tale of three markets . 2 In the last few years, the correl a t i o n between housing and stock markets has broken down. Employment seems to be a key factor. 40th Anniversary . 3 New members . 3 In d u s t r i a l rep o r t . 4 When the economics of leasing, pu r chasing or building a new indus- trial building in the GTA are com- pa r ed, totals are surprisingly close. Into depression & beyond . 6 Omens of global depression are gathering, but there is promise of a bright future beyond – and Land Economists have a role to play. Use the aole.org website! . 7 Keep your information curren t ! Legislative Beat . 8 House in Recess • New Minister of Municipal Affairs and Housing • Pr ovincial Election Readiness • Pro p e r ty Assessment and Classifi- cation Review • Statute of Limitations • Alternative Energy and Fuels • Sustainable Water and Sewage System Act • Municipal Act/Elections Pr ofessional Journal of the ASSOCIATION of ONTARIO LAND ECONOMISTS 1235 Bay Street, Suite 400 Toronto, Ontario M5R 3K4 Tel: (416) 934-5166 Fax: (416) 969-8916 Website: www.aole.org E-mail: [email protected] A tale of three markets by Will Dunning PLE Chart 1 During the 1990s, the Toronto housing market was loosely correlated with the stock market. During 2000 to TSE index vs Toronto CMA employment 2002, however, there has been a disconnection between 12000 3000 these two major markets. While the stock market has TSX Index declined sharply, with the TSX down by about 40% from 10000 Employment 2800 its August 2000 peak, the GTA housing market has strengthened. Records for new home sales were set each 8000 2600 year from 2000 to 2002. 6000 2400 One interpretation might be “asset substitution” – the idea that as the stock market has weakened, investors have 4000 2200 shifted res o u r ces to a diffe r ent asset class – their homes. 2000 2000 On closer examination, it seems that another market – the job market – is intervening between the two. 0 1800 1990 1992 1994 1996 1998 2000 2002 The TSX started a strong upward movement in late 1995; employment began to increase strongly about a year later. Si m i l a r l y , about a year after the stock market peaked in August 2000, employment growth almost halved (Chart 1). C h a rt 2 - Two bubbles and two busts A number of mechanisms link a rising stock market with job Causes of employment growth in Toronto CMA creation: q Stock transactions and Im p a c t i n g Jun 84-Jun 89 Sep 89-Sep 94 Aug 94-Aug 01 Aug 01-Nov 02 profits influence employ- Var i a b l e 1, 0 0 0 s % of 1, 0 0 0 s % of 1, 0 0 0 s % of 1, 0 0 0 s % of ment in the financial of Jobs Tot a l of Jobs Tot a l of Jobs Tot a l of Jobs Tot a l services industry. TS X 87 25 % -3 6 25 % 30 0 52 % 12 22 % q With the substantial amount of invested wealth in the $ CDN 38 11 % -1 1 7% 21 2 37 % -1 0 -1 8 % Tor onto area, increased stock Raw Materials values lead people to spend Price Index -7 4 -2 1 % -2 1 15 % 17 3% 13 24 % more, which generates jobs. Mo r tgage Rate 90 26 % 41 -2 8 % 30 5% 1 2% Real House Prices 19 1 54 % -9 4 65 % -1 4 -2 % 28 50 % q Increased funds are available to start new businesses and Un e x p l a i n e d 20 6% -2 4 16 % 32 6% 12 21 % expand existing businesses. Total Change in The statistical analysis in Chart 2 Em p l o y m e n t 35 1 10 0 % -1 4 5 10 0 % 57 7 10 0 % 56 10 0 % decomposes the impact of a number of key variables on employment in the Toronto area: q During the late 1980s ‘Boom’, increased wealth Chart 3 caused by the growth in real house prices had the most significant impact on employment. Significant Impact of 1000 jobs on new home sales amounts of stimulus were provided by other variables. The only negative factor was the rising prices of raw materials (RMPI). Freehold q During the subsequent recession, the biggest negative factor was falling house prices. Condo q q During the late 1990s, the rapidly inflating TSX stock index generated more than one-half of job g rowth in the To ronto CMA. The steady depre c i a t i o n of the Canadian dollar provided additional stimulus. The only negative factor for employment was that house prices declined modestly in real term s . q Since August 2001, the greatest support for To ro n t o CMA employment has again been from rising house 2 prices. Falling prices for raw materials have also been positive. On the other hand, the Canadian dollar has been a negative factor. Changes in employment do not affect sales in the housing market instantly. As an output from my forecasting models, I have estimated the lag effect between employment growth and sales of new homes in the GTA (Chart3). In the first half year after 1000 new jobs are created, the result is only about nine new home sales. That rises until the fourth half year, when about 46 freehold sales and 13 condominium sales are generated – then the effect begins to decline. C o n c l u s i o n An excessive amount of employment was generated by the stock market bubble of the late 1990s. So far, the falling TSX has not had a very negative impact on employ-ment, as there is still a slightly positive equity wealth effect. H o w e v e r, in the near future, the TSX declines will likely begin to exert a significant negative influence on employment. It is possible that in the near future there will be outright reductions of employment in the Welcome New Members! To ronto CMA. That downturn should be gradual, as the recent increases in house Gregory Bell PLE William Nichols MSc, PQS, prices, the depreciation of the dollar, and Royal LePage Commercial Inc. MCIOB, PLE reduced interest rates will act to support Toronto Mutual Gain Inc., employment. 416-359-2638 Toronto [email protected] 416-491-1711 ext 23 Despite the economic slowdown, housing [email protected] market activity so far has been excep- Gus Dal Colle PLE tional. Previous employment growth has Altus Group, Toronto Sue Perella AIMA, PLE generated a very large pool of people 416-221-1200 ext 208 Derbyshire Viceroy Consultants who are getting into position to buy a [email protected] Limited, Toronto home. During 2003 and 2004, that pool 416-232-9999 ext 271 of buyers will be depleted gradually. In Winson Chan FRI, MCMI, [email protected] con-sequence, the outlook is for a MBA, PLE Del Realty Inc., Unionville gradual winding-down of housing J. Douglas Shenton PLE 416-230-1681 market activity. After setting a new Wendy's Restaurants of Canada Inc. [email protected] re c o rd in 2002 (expected to be 55,500 Oakville sales), new home sales are forecast to be Thomas Davis P.Eng, PE, PLE 905-337-4645 in a range of 37,500 to 45,500 in 2003. Green-Tech Environmental [email protected] Engineering Ltd., Toronto Tony Volpentesta MCIP, Will Dunning, an economic consultant 416-364-1760 RPP, PLE who specializes in analysis of the [email protected] Bousfield, Dale-Harris, Culter & housing market of the Greater To ro n t o George Lysenko MA, MCIP, Smith Inc., A rea, spoke at the November dinner CMM, PLE Toronto meeting. Samples of his subscription Forhan Rogers, Newmarket 416-947-9744 “ F o recast Report” on the To ro n t o 905-895-0011 [email protected] economic and housing market outlook, [email protected] and other recent re p o rts are available at w w w. w d u n n i n g . c o m . 3 The following analysis compares the costs for a typical industrial building of 100,000 square feet on 5.1 acres of land in four municipalities: the City of Industrial report Toronto (represented by North York), Mississauga, Vaughan, and Pickering. Three options are considered: leasing an existing building, purchasing a building, and The Economic purchasing land and building a new facility. While the market decides how much it will cost to build a new factory or lease an existing factory, the Province and local Government determine the taxes and Industrial Bui development charges on new construction. The analysis considers those compara- tive factors due to market conditions (i.e. land costs, lease costs building pur- by Alastair H. Strachan chase costs) and those due to municipal conditions (i.e. annual taxes, develop- ment charges). the City of Tor onto is the only Municipality between Burlington and Pickering and north to Newmarket Chart 1 Taxes, Maintenance & Insurance that does not levy a Development Charge. (There is an Education Development Charge in all Toronto Mississauga Vaughan Pickering Mu n i c i p a l i t i e s ) . Tax rate 7.14% 4.06% 3.61% 3.58% Leasing an Existing Building (Chart 3) Assessed value $4,000,000 $4,000,000 $4,000,000 $4,000,000 When it comes to leasing on an equivalent net Total $285,600 $162,400 $144,400 $143,200 rent per square foot comparison, Toronto is, Tax($/sf) 2.86 1.62 1.44 1.43 surprisingly, the least expensive.